Recent SAFE measures will begin to have positive effect: experts
China's foreign reserves slipped beyond the $3 trillion level in January, the lowest level since February 2011, but experts predicted on Wednesday that the country's loss of foreign reserves would slow down over the next few months.
By the end of January, China's foreign reserves fell by 0.4 percent year-on-year to $2.998 trillion, down $12.3 billion compared with the end of 2016, according to statistics revealed by the People's Bank of China (PBC), China's central bank, on Tuesday.
The country's rapidly shrinking foreign reserve stockpile, which has been dropping for the past 7 months, has aroused market worries about how China's once gigantic foreign reserve pool - just shy of $4 trillion in June 2014 at its peak - would evolve in the future.
According to a statement released by the State Administration of Foreign Exchange (SAFE) on Tuesday, China's foreign reserves are still sufficient, regardless of whether it is judged by the scale (still No.1 in the world) or by other adequacy indexes.
"It's normal that the foreign reserves would fluctuate, and we don't need to attach too much importance to the so-called psychologically important whole number level," the statement said.
Slowing capital outflow
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, predicted that domestic foreign reserves would continue to decline, though at a much slower rate, over the next few months.
According to Zhou, the need for foreign currency reserves usually peaks at the end or beginning of a year, which means that the exchange of the yuan for overseas currencies will decrease in the next few months.
He also noted that the government launched a series of measures at the beginning of 2017, such as adding further detail to the application form for buying foreign currency in China to strengthen the management of foreign currency trading, and that it's likely that the effects of those measures will manifest soon.
Liu Jian, a senior research fellow at the research center under the Bank of Communications, also expressed similar views. "I think the loss of foreign reserves will be less in 2017 compared with 2016 or 2015," he noted, stressing that one of the reasons is that the government has taken measures to attract capital inflow.
SAFE launched a series of measures in late January to facilitate foreign exchange settlement by overseas institutions in China.
Statistics show that the decrease in the country's foreign reserves started slowing last month.
Domestic foreign reserves declined $28.8 billion on a monthly basis in January, compared with a $41 billion month-on-month decline in December.
Zhou noted that "possibilities exist" that China's foreign exchange reserves might fluctuate with corrections in the next few months, which means that the reserves might fall and rebound around $3 billion.
He also said that now that the foreign exchange reserves have fallen beyond the $3 billion level, there will be market expectations for more government intervention, and those expectations might help the yuan's exchange rate to stabilize further.
Dumping U.S. bonds
Zhou said that the decreasing reserves are a direct result of the Chinese government's dumping of U.S. bonds in recent months to meet a rising demand for dollars.
He noted that the dollar's strong position wouldn't be affected by China's selling of U.S. bonds. "The currency is still within an appreciation cycle," he said.
Liu also pointed out that China's decreasing U.S. currency reserves would not have much impact on the trend of the dollar, which is mostly subject to the influence of the U.S. economy and the euro.
According to figures released by the U.S. Treasury Department on January 18, China's holdings of U.S. government bonds fell by $66 billion in November to $1.05 trillion, marking the sixth straight month that China has reduced its holdings.
Zhou said that whether the dollar's interest rates will rise depends on whether President Donald Trump will roll out measures like tax cuts and infrastructure investment, and if that happens, it would add further pressure on the yuan.
